There are numerous financial instruments available on the market and people invest in them for a variety of reasons. Some investors are interested in obtaining high rates of return on their investments, while others are willing to forego high rates of return in exchange for a reduced level of financial risk. Some investors are interested in obtaining an income stream for a period of time or possibly for life. When making decisions regarding the selection of a financial instrument, there are multiple tradeoffs. Typically, the lower the risk is, the lower the expected rate of return will be. There are also numerous tax consequences that may be considered when selecting a financial instrument.
For investors interested in obtaining an income stream, there are numerous financial instruments available. For example, investors may invest in certain bonds, certificates of deposits, or annuities. Some of these financial instruments provide fixed income streams, while others provide variable income streams. Bonds, for example, are typically available with fixed income payments. However, there are also variable rate bonds with income payments that change periodically based on market conditions, step-up bonds with income payments that increase at a fixed rate or at pre-determined intervals until maturity, and inflation-indexed bonds with income payments that are adjusted to keep pace with inflation. Similar options are available for annuities, certificates of deposit, and other financial instruments.
For a typical fixed coupon bond, an issuer offers a group of bonds with at least a defined maturity and a defined coupon rate. These bonds are typically underwritten and/or marketed by one or more intermediaries such as a broker or an investment bank. These bonds can then be purchased from the one or more intermediaries. The purchaser typically purchases bonds with a lump sum deposit. Once purchased, the issuer agrees to make periodic payments based on the coupon rate and then to return the bond's par value upon maturity.